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AFP
The latest European challenge to the all-powerful US credit ratings agencies doesn’t come from the continent’s financial capital Frankfurt — but Berlin, better known for raves than banking.
“We want to become the European voice on the ratings market,” declares Torsten Hinrichs, chief executive of Scope Ratings.
From his office overlooking the huge Tiergarten park, once the hunting ground of Prussian kings, Hinrichs outlines grand ambitions of his own.
His firm is owned by wealthy, traditional German economic actors, including the Schoeller family whose businesses stretch from an eponymous bank to textile to oilfield equipment, and Stefan Quandt, the billionaire heir to a big chunk of BMW.
Now Scope Ratings is attempting what others have failed at in challenging the dominance of the three massive ratings agencies.
Moody’s, Fitch, and Standard and Poor’s currently control 92 percent of the European ratings market.
Companies and institutions that borrow money pay the agencies to evaluate their creditworthiness.
The highest score on offer is the sought-after “triple-A” — and the better the score, the easier it is to raise money on favourable terms.
Scope notched up a big milestone in August, signing up its first client on the benchmark DAX 30 index of leading German shares in the shape of Munich-based industrial gases firm Linde.
But Scope is still far from the gargantuan scale of the US agencies, accounting for just 0.14 percent of the European market in 2014, according to the European Securities and Markets Authority (ESMA), and around one percent more recently, Scope’s own internal estimates suggest.
Scope has so far been able to raise money every time it has wanted to expand, allowing it to focus on growth rather than profitability.
Hinrichs acknowledges that the agency is losing money, although he keeps the figures close to his chest.
European nuances
ESMA has licensed 26 ratings agencies in Europe, making for a fragmented market on the old continent.
Scope hopes to change that, and has spent 20 million euros ($22.7 million) opening offices in Paris, Milan and Madrid over the past three years.
The agency currently has 60 employees, 35 of them analysts.
“We’re in talks with other European ratings agencies,” Hinrichs said. “We can all see the aim of creating a counterweight to the Americans.”
He argues that “there has long been a high demand for alternative approaches to ratings”, which take a more nuanced view of European firms and offer “more realistic” prices compared with the “oligopolistic way of thinking” practised by US competitors.
Scope says it uses a more subjective, less robotic method of rating, as well as rewarding the unique strengths of European companies more generously than its counterparts across the Atlantic.
Whether firms are family-owned — seen in Europe as a guarantor of stability — their cash reserves and their pensions commitments are some of the factors Scope says count for more in its model than the Americans’.
“Our investment-holding approach, as a family company with a long-term perspective, is understood better by a European ratings agency,” said Dietmar Bochert, spokesman for Haniel.
The centuries-old investment firm based in Duisburg, in Germany’s historic western industrial heartland, has been a Scope customer since the beginning of the year — while maintaining its custom with Moody’s and S&P.
‘Paper tiger’
Founded in 2002, Scope began by rating funds and small- and medium-sized enterprises, but has since broadened its ambitions to cover all kinds of asset classes.
On its books now are banks, businesses, and local authorities like the French seaside town of Quimper in Brittany, which signed up in 2015.
By acquiring Germany’s Feri EuroRating, Scope has added government debt to its portfolio, currently rating 59 different nations’ bonds.
The task for the German minnow faced with the three American whales is far from easy.
It’s fighting a battle others have lost in the past, with German consultancy Roland Berger abandoning its own fledgling ratings agency in 2012 for lack of funds.
Politicians have bemoaned US dominance in ratings since the 2008 financial crisis, when some blamed the big ratings firms for failing to see the disaster coming.
But legislative attempts to boost the European competition have sputtered.
EU governments have failed to seriously enforce a recent European rule designed to support players with a market share smaller than 10 percent, leaving it little more than a “paper tiger”, laments Scope CEO Hinrichs.